With six weeks to go until the birth of the new year, you might think that the election of Donald Trump as US President marked the last real moment of significance for 2016. But between now and December 31st, five more events are due to take place which have the potential of shaping the direction of the next 12 months – both financially and politically.
Here they are in order of date:
OPEC meeting – November 30th, Vienna:
The Organization of the Petroleum Exporting Countries (OPEC) gather at the end of this month to try and secure a deal that limits the production of oil in the Middle East, Southeast Asia, Africa and South America.
The consensus is that there is an oversupply of oil in the world which is suppressing its price. Back in September, a preliminary agreement was reached to cut supply during a meeting in Algiers. This next meeting is seen as being the one that will make the agreement official.
According to Bloomberg, ‘OPEC embarked on a final diplomatic effort to secure an oil-cuts deal, with its top official heading on a tour of member states as Russia scheduled informal talks in Doha this week with nations including Saudi Arabia. Vienna, Saudi Arabia, Iraq and Iran are still at odds over how to share output cuts, said a delegate.’
The price of Brent Crude as of writing stands at $46 a barrel, with Nymex Crude priced at $45. After the meeting in Algiers the price went as high as $54 on the expectation that a deal will be agreed this month. However, as doubts began to grow, the price slipped back.
According to Jens Weidmann, head of Germany’s Bundesbank and also Chairman of the Board of the Bank for International Settlements, the subject of inflation is intricately tied to the price of oil. At a meeting in Amsterdam earlier in the month, Weidmann commented, ‘There are a number of reasons why inflation is currently so subdued in the euro area, including the low oil prices’.
The chances of a cut in supply are slim if you look back on past meetings of OPEC. Failure to secure a deal this time round would probably produce a volatile reaction in the market place, with the price of oil dropping further. By past history alone, I think this is most likely. If an agreement is reached, however unlikely, expect oil prices to surge in the run up to Christmas.
Italian Constitutional Referendum – December 4th:
Following ‘Brexit’ and Donald Trump’s election, this is the next event that is being touted as a further opportunity for anti-globalisation sentiment to dominate the narrative.
As reported in The Economist, this is ‘a referendum asking voters to approve proposed changes to the constitution.’ These changes focus primarily on reforming the Senate, which if approved would make the lower chamber more powerful than the upper chamber. Of real importance here is what that means as regards decision making. Powers would be devolved from regions to the central government. A key tenet for centralising control.
Changes to the constitution has the support of Italy’s biggest companies and corporations. The argument being that, ‘A stronger central government would be expected to be pro-business and bring about further reforms, such as speeding up the civil judiciary, cutting bureaucracy and unleashing more competition into Italian markets so that productive capital can flow in.’
In a sentence, this means creating a further opening for the tentacles of globalisation. The referendum of course comes at a time when globalisation has been in the cross hairs following ‘Brexit’ and Trump.
Maria Paola Toschi, a global market strategist at JP Morgan Asset Management, told CNBC that, ‘The victory of no could open a period of uncertainty on the political stability of the current coalition that has been always strongly committed on reforms.’
The same CNBC article pointed out that, ‘a defeat in the referendum for Italy could lead to social turmoil in other countries that are already facing a strong resistance to changes with elections across Europe that will take place next year.’
Italian Prime Minister Matteo Renzi has raised the stakes of the referendum by saying he will resign if the result is to reject changes to the constitution. Opinion polls, for what they are worth, are all saying a no vote is leading the outcome. Renzi is also not helped by the fact that he was one of few world leaders to publicly endorse Hillary Clinton in the run up to the US election.
Added to this is the rising popularity of Italy’s anti establishment ‘5-Star Movement’ party, which supports a no vote and is seeking to gain power in next years Italian general election. Beppe Grillo, who leads the party, was quick to praise the result of Donald Trump’s victory in the US. He said, ‘it is those who dare, the obstinate, the barbarians who will take the world forward. We are the barbarians! The real idiots, populists and demagogues are the journalists and the establishment intellectuals’.
Opinion polls have been disgracing themselves as far back as the UK general election in May 2015. On this occasion, I think they will be proven correct and changes to the constitution will be opposed, which will mark the beginning of Italy’s move towards ‘nationalism‘. It will also further undermine the Euro zone and create the conditions necessary for further divisions within the EU in 2017 (France, Germany and Italy all hold general elections over the next 12 months with anti-establishment parties seeking power.)
Austrian Presidential Election – December 4th
Curiously, this election takes place on the same night as the Italian constitutional referendum. A clear opportunity for a two thronged rejection of globalisation and the establishment within the space of 24 hours, creating further the sentiment of ‘nationalism’ as a backdrop to ending 2016.
Originally, this Presidential election took place earlier in the year but the result was ‘annulled by the Constitutional Court because of vote-counting irregularities’.
The candidate for the Green Party, Alexander Van der Bellen, has positioned himself as ‘a pro-EU liberal on a mission to preserve Austria’s international standing and safeguard democratic rights’.
His opponent, Norbet Hofer, who leads the ‘far right‘ Freedom Party (FPO), has been critical of the EU and has ‘underscored the need for security in Austria against the backdrop of a refugee crisis that he argues the government has grossly mismanaged.’
As with Beppe Grillo in Italy, Hofer has taken advantage of Donald’s Trump’s victory, stating that ‘the “ignored” masses are rising up against the “out of touch elites” in an infectious, cross-border, domino-effect revolution.’
The Freedom Party are consistently leading opinion polls, apparently by more than 10 points. This would put them on course to win parliamentary elections, which are likely to take place soon after the Presidential vote if Hofer wins.
Amidst the rise of ‘nationalist‘ sentiment, Alexander Van der Bellen has said that if Hofer does emerge victorious, he will use his presidential power to dissolve parliament and call a snap general election. This would ultimately lead to a Freedom Party led government.
Van der Bellen also cautioned that, ‘I hope Austria does not become the first Western European country in which right-wing demagogues take power.” To prevent this, he urged “people who don’t particularly like me or Hofer” to nonetheless vote for him.’
The lesser of two evil option was exactly how the US election was portrayed through portions of the mainstream media. I think Van der Bellen’s words can be taken less as a warning and more as which way the tide is being directed to go.
December 4th will belong to the rise of ‘nationalism’ in Europe, further stoking fear of what may or may not follow in 2017.
ECB Monetary Stimulus Decision – December 8th
If ECB President Mario Draghi announces the tapering of their quantitative easing programme, which is currently buying €80 billion a month of government and corporation bonds, it would mark the gradual end of central bank intervention into the world market. A necessary step if the plan is to force the collapse of the economy over the next couple of years.
According to CITY AM, quantitative easing in the EU was ‘designed to let households and businesses to borrow at cheaper rates, and encourage banks to lend more cash – thus targeting both supply and demand. More borrowing should then kick-start spending, supporting growth and pushing up inflation towards the ECB’s “below, but close to two per cent target’.
The ECB’s current programme ends in March 2017. It is a certainty that intervention will persist past this date, but whether it amounts to the same €80 billion a month remains to be seen.
ECB President Mario Draghi gave a press conference on November 18th discussing the central bank’s stimulus measures in which he said, ‘Despite the uplift to prices provided by the gradual closing of the output gap, a sustained adjustment in the path of inflation still relies on the continuation of the current, unprecedented financing conditions. It is for this reason that we remain committed to preserving the very substantial degree of monetary accommodation, which is necessary to secure a sustained convergence of inflation towards level below, but close to, 2 percent over the medium-term.’
Draghi’s comments are being taken as dovish, with the expectation that measures will continue at the current rate or perhaps be increased.
If you believe Luigi Signorini, a member of the Italian central bank’s executive board, the ECB is not even considering reducing its bond buying programme. Asked during testimony to parliament whether the ECB was looking to taper Quantitative Easing, Signorini said, ‘There is no prospect of this. The question is how much to extend the limits that were given.’
As with all things monetary, the words of Jens Weidmann bare repeating. Many analysts have been commenting for a while that central banks are ‘running out of ammo‘ in being able to stimulate the economy through the purchase of government and corporate bonds. Weidmann is now openly endorsing that perspective.
Here is a passage from Weidmann’s speech to the Annual General Meeting for the Members of the Foreign Bankers’ Association, Amsterdam, 3 November 2016. Consider his choice of words carefully in relation to the ECB decision next month.
‘All in all, the risks of ultra-loose monetary policy are becoming increasingly clear. This is not just about the Euro system’s government bond purchases, which are blurring the boundaries between monetary and fiscal policy. Central banks are becoming the largest creditors of the member states. This could lead to a situation where monetary policy becomes harnessed to fiscal policy and is pressured to make high levels of debt sustainable through low interest rates.
All the more so given that the low-interest-rate environment offers no incentive for governments to consolidate their public finances. Fiscal policy in the euro area has been loosened again noticeably over the past few years. What governments are saving in interest payments isn’t being put towards the urgent goal of reducing debt.’
Recall Weidmann’s comments about inflation earlier on when discussing the upcoming OPEC meeting. A rise in inflation, or the perceived expectation of it, would be necessary to precipitate a reduction in QE at this time. If economic data appears on the surface to be improving, this will guard against the true malevolence behind any decision to cut stimulus.
When consensus on a course of action rallies behind a biased perspective e.g. ‘Brexit’ and Trump cannot happen, the opposite has tended to run true as of late. Having originally thought that the ECB would leave their bond buying programme unchanged, I’m now leaning towards them tapering it from March 2017 onwards. It would set the conditions for further stimulus cuts from other central banks, particularly if there is a spike in inflation under Donald Trump.
On the flip side, if the ECB leaves their QE programme unchanged or even increases it, then I envisage the US as being the first major central bank to lead the way in gradually withdrawing monetary support from the market.
Federal Reserve Interest Rate decision – December 14th
The last time the Federal Reserve increased rates was December 2015. That represented the first increase since June 2006. The expectation this time round is for a rate hike, of which Fed chairwoman Janet Yellen talked up further on November 17th by saying, ‘Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee’s longer-run policy goals. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.’
Chances of a rate increase spiked after the US election. But immediately after it became clear that Donald Trump was going to defeat Hillary Clinton for the US Presidency, the outlook appeared grim. Futures markets collapsed. The fear was of a similar if not bigger sell off than was seen straight after the ‘Brexit’ vote in the UK.
However, it didn’t materialise. Markets in fact rallied on the news. Whilst stocks went up, gold and silver were smashed. At the time of writing, stocks were nearing an all time high of 19,000 on the Dow Jones.
Reasons for this, as cited by Bloomberg, include ‘Trump’s spending plans, and Republican control of Congress, which are causing the market to revise higher its outlook for the pace of Fed rate increases.’
Therefore, as expectations for inflation have increased, so has the likelihood of a rate rise in December.
The President of the St. Louis Fed, James Bullard, said ‘there’s a chance the U.S. economy could get a medium-term boost if Trump increases infrastructure spending and tax reforms, though it’s too soon to say how the economy may be affected by the election.’
On the subject of Donald Trump, Zero Hedge reported how ‘The market’s reaction has been to assume that this is a harbinger of rising inflation due to a tidal wave of “imminent” fiscal easing, and has accordingly pushed up the December rate hike odds to above 90%. After all, the logical offset of the expected easing in fiscal conditions is for the Fed to tighten monetary policy, arguably the only source of market gains (and economy support) over the past 7 years.’
This analysis coincided with a warning from none other than The Bank For International Settlements. Hyun Song Shin, who is head of research at the BIS, said that with regards to gauging risk in today’s market place, the usual means of the VIX (Volatility Index) is no longer an accurate measure. Instead, a stronger dollar – seen by many mainstream analysts as a sign of confidence in the economy, may in fact signify a greater risk because of a substantial world dollar funding shortage.
Shin now believes that ‘the world’s most traded currency is now the true fear gauge: the US Dollar.’
Given the role that I believe the BIS played in the outcome of both ‘Brexit’ and Donald Trump’s ‘victory’, Shin’s words should be taken seriously.
Barring a late change of tack, the fed will raise rates in December, likely by 0.25% as they did a year ago. The markets are operating on the expectation that inflation is coming and that this will boost productivity in the economy.
A rise also lays the grounding for the inauguration of Donald Trump on January 20th, 2017.
What should not be forgotten, however, is that after the Fed’s rise last year, January 2016 saw the worst ever opening to a new year for markets throughout the world.
We wait to see how this and the beginning of Trump’s presidency sets the narrative for the months ahead.